I think with E4, if you think carefully, you'll realize we have the answer to the shows entire mystery.

This is just my theory (but its almost guaranteed to be correct)

Christopher clearly created the town to trap people in just like he trapped the first children he was with (including Victor). It all started when he started controlling puppets as we see in the flashback. He probably used dark magic to control them and turn them into monsters.

His vengeance against the children was to trap them and attract more people to feed them.

The dark magic uses a victims greatest fear against them.

This explains everything including how "someone" is watching their every move.

It explains the motive of the horrors of the town.

It explains the monsters and why Victor is the key to it all (he's the only remaining child who knows Christopher).

It explains the biggest mystery of all: why talisman keep the monsters out of houses. If they are operated with dark magic, the talisman are surely "dark magic repellants" - some sort of anti-evil symbol.